During the first three quarters of 2020, institutional investments in Indian real estate experienced a significant short-term pullback. As asset valuation and revenue stability became difficult, most investors remained cautious, resulting in a dramatic drop in the number of transactions. However, major portfolio transactions in the fourth quarter resulted in total investments of $5 billion in 2020, which is slightly less than the previous year. It’s worth noting that listed REITs received a strong response in the primary markets, opening up a new investment opportunity for retail and institutional investors.
Institutional investors should be able to develop asset portfolios or co-invest with existing platforms prior to the IPO by listing new REITs. REITs’ evolution in India has been a huge success, with all the three listed REITs being oversubscribed. Global investors seeking a steady yield and regular returns have been drawn to good sponsor consistency, track record, accountability, and the ability to produce consistent returns. Landlords with income-producing core office assets are forming strategies to sell their properties to REITs. REIT asset acquisitions would increase as a result of a clause in the Union Budget 2021-22 that allows for low-cost debt financing from international portfolio investors. Due to stable rental yields and income visibility, office assets are expected to be the preferred choice.
The pandemic-related uncertainty continues to sway investment sentiment. Investors are likely to concentrate on assets with higher yields and lower rental growth to ensure income stability. Although office assets will continue to attract the most investment, defensive assets such as logistics and data centers will provide opportunities and are expected to grow in popularity. With the revival of the economy, investments in retail and hospitality will also gain momentum.
With the resumption of maximum economic operation later this year, asset pricing is expected to increase. Better price discovery is likely to support core office assets with consistent profits. On the other hand, opportunistic assets are likely to see more price changes due to their lack of income certainty and higher risk. The emerging Indian REITs market is expected to draw cross-border investment and increase asset pricing transparency, resulting in more mature markets. Investments in Indian real estate can reach new heights as a result of this loop of rising maturity and capital flows.
The office market will continue to be driven by strong market fundamentals in the form of sustained IT sector growth, rising demand from sectors such as e-commerce, healthcare, and FMCG, and the growing involvement of institutional investors in 2021. New completions are projected to total around 38 million square feet this year, with net absorption hovering around 30 million square feet. This corresponds to the annual net absorption rate seen from 2016 to 2018. There is something to look forward to in 2021, with the introduction of vaccines and the alleviation of COVID-19 fears.
In 2021, the global economy is expected to recover, and because we expect a ‘V-Shaped’ recovery for India, demand is expected to remain high. Tenants will intend to be aggressive in 2021 to cover inevitable delays. Although it’s difficult to predict numbers, if external factors remain stable (e.g., no COVID relapse or Lockdown, successful vaccine administration, etc. ), absorptions in 2021 are projected to be more than to those in 2019.
(By Ashish Bhutani, MD, Bhutani Infra)